Co-operative Bank downgraded to ‘junk’ status

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   By a Newsnet reporter

The credit agency Moody’s has downgraded the Co-operative Bank’s credit rating to ‘junk’ status, after warning that it could need ‘external support’ to deal with problem loans.

The Co-op’s Chief executive Barry Toottell resigned after the warning from Moody’s that the bank’s capacity to absorb future losses was now too low to support an investment grade rating.

Earlier this year the bank reported annual losses for 2012 of £674 million, and withdrew from a planned takeover of 632 branches of the Lloyds Banking Group.  The credit agency estimates that the proportion of “problem loans” held by the Co-op bank has now increased to 10.9% of the bank’s loan portfolio, up from 8.1% in 2011. 

According to Moody’s most of the bad debts are due to a deterioration in the bank’s commercial property portfolio, and arise from bad loans associated with the bank’s takeover of the Britannia Building Society in 2009.

Moody’s stated that the bank’s credit status may be downgraded yet further, as the market is concerned that without a taxpayer bailout the bank may not be able to meet its financial commitments.  The Co-op has said it is “disappointed” by Moody’s decision, but insisted that it would not require a bailout.

In a statement issued after the credit agency had downgraded the bank, a spokesperson for the Co-operative Bank said:

“We are disappointed by the ratings downgrade announced by Moody’s. We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements.

“We do acknowledge, like the rest of our banking sector peers, the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements, and we have a clear plan to drive this forward throughout the coming months.

The spokesperson added: “The actions we will now take to strengthen our balance sheet and simplify our business model around a core relationship banking offer, will create a compelling co-operative banking business which is truly distinctive within the banking sector.”

The Co-operative Bank owns 26.7% of the Unity Trust Bank, which is the bank used by major trades unions and one of the major sources of credit for the Labour party.  Union leaders held an emergency meeting on Friday to discuss the bank’s future.

Billy Hayes, general secretary of the Communication Workers Union (CWU, said the downgrade was a “major worry for the unions and our members”.  He added that the unions would consider calling for a public inquiry into the Co-operative’s business practices in an effort to discover what went wrong, and would also call for any bonuses paid to senior directors to be paid back.

The Co-operative Group, the bank’s holding company, is the biggest affiliate supporter of the Co-operative Party, which fields candidates in UK national, regional and local elections on joint tickets with the Labour Party.  32 Labour MPs sit as Co-operative Party representatives, including five from Scotland: Ian Davidson, Mark Lazarowicz, Gemma Doyle, Tom Greatrex, and Cathy Jamieson.

The Co-op also owns 26.7% of Unity Trust Bank, which is the trade union’s own bank and there are concerns that the downgrade of the Co-op bank could affect Unity Trust.

Asked whether the Government would be prepared to step in to help the Co-op Bank if required, a spokesperson for Prime Minister David Cameron said: “I’m not going to speculate on something that hasn’t happened yet.

“I would simply say that we are committed to having a strong and stable financial sector, and when we say ‘strong and stable’ we also mean well-regulated.”